Tuesday, October 31, 2006

Social Security Reform Revisited

This past week, President Bush resurrected the issue of Social Security Reform. As part of this political season, it seems he wants to flex some presidential muscle by attempting to re-establish his core initiatives which have stalled in congress over the past 6 years. Clearly, the war on terror has made a robust domestic agenda difficult.

On the topic of Social Security Reform, much has been written - particularly on privatization. I wrote something in a comment on SystematicHR back in April before becoming a regular contributor. The general SystematicHR readership has grown since then. For some, posting it here again will be a repeat, but many of the readers of this blog get only the daily subscription and do not visit the site to read the comments, so for them this will be new.

So in recognition of the resurrection of Social Security Reform I give you:

Social Security - Private Ownership, Government Control

In 2004, the California Public Employees’ Retirement System (“CalPERS”) sought to oust the Chairman of Safeway foods, who happened to battle against the large union group represented by the CalPERS president. Columnist Dan Walters stated “What’s happening with CalPERS….is part of a larger, nationwide effort by labor unions to gain leverage with corporations by wielding investment power of public pension fund.”

I was able to learn this from the website of the California State Senate Republican Caucus. It seems they are concerned about “activism” in the management of monies for a public trust fund. And apparently with good reason; the “responsible investing” money management style which CalPERS follows may actually cause earnings to drag, and cost the people of California more in the long run.

CalPERS has a long history of using its political clout to pressure corporations to abide by CalPERS criteria that have nothing to do with investment returns. Clearly, the threat of divestiture of any particular company’s stock and the resultant decline in the stock value is powerful leverage for CalPERS.

According to the California Republican Caucus, CalPERS uses this power to “promote social and political agendas such as affordable housing, international human rights, affordable healthcare, and environmental activism.” This is, evidently, counter to the California Republican Party platform.

So how, exactly does CalPERS have so much power? Through two primary means CalPERS is able to influence corporate policy. Without getting too complicated, CalPERS can either threaten to divest it’s investment in a company (sell all their stock and drive the price down as a result), or through the voting of the “proxies”, remove board members or the chairman him/herself.

CalPERS is able to do this because as of the end of 2004, The CalPERS trust fund was valued at almost $190 billion dollars. A staggering amount to be sure.

This brings me to the primary point of this article: Social Security. The current proposals to “save” Social Security allow for individual accounts which would be invested in a mix of stock and bond funds. Individuals investing in this manner would not have direct ownership in individual company stock, but rather a “pool” of investments. The money managers of these funds would decide in what companies to invest. The money manager would also be responsible for the voting of the company stock shares or “proxies.” This is pretty much how it currently works if you invest in a mutual fund either individually or through a company 401(k) plan.

Maybe you can see where this is headed.

As applies to the Social Security Trust fund, these funds would be managed not by private mutual fund companies, but by government employees: no doubt political appointees. Well certainly, the Social Security trust fund couldn’t exercise as much clout as CalPERS, could it? I mean, CalPERS has amassed billions over the years.

In a word, yes. The Social Security trust fund could exercise that much clout, and more. To put it into perspective, the additions to the trust fund in 2004 as a result of payroll taxes was $472 billion. That’s 2.5 times the entire CalPERS fund added to Social Security in only one year.

Different current proposals for SS reform provide for different rules. For example, one proposal would allow approximately 2/3 of total employee contributions to be invested in this way. The proposal is silent on the employer portion, but let’s assume that the employer portion will not be invested in stocks. A quick calculation reveals that conservatively, $158 billion a year would be invested in stock and bond funds. That’s nearly the equivalent of a CalPERS being created every year. Talk about the potential for political and social activism!

Oddly, there is precious little detail in the proposals being bandied about. The hook seems to be simply “It’s your money, shouldn’t you be in control of it?” It seems that with this mantra, detail isn’t really needed.

One thing is clear, however, regardless of the details, through the Social Security trust fund, the Federal Government would become the single biggest investor in the stock market on the planet. OK, well, technically I suppose you could say the government would not be the owners, rather the American people: the account holders. So let’s amend the above statement:

The Federal Government would be the single biggest controller of business on the planet.

Private Ownership, Government Control

Regardless of your political leanings, is this what you want; the potential, nay the probability, that the Social Security trust fund would be used for activism at the whim of the controlling party?

“Fascism should more properly be called corporatism, since it is the merger of state and corporate power.” Benito Mussolini is credited with that quote. And he should know.

About the author – Donald Glade is President and Founder of Sourcing Analytics, Inc., an independent consulting firm specializing in helping companies optimize their HR / benefits / payroll service partnerships through relationship management, financial analysis, and process improvement.